London Metal Exchange CEO Debunks the Myth that Speculation is the Culprit for High Prices

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Don't be duped by the spin machine, Fools. Interventions by governments into free markets always fail, and with consequences that are crippling to markets. These statements from the LME make U.S. politicians like Lieberman look like idiots, though they do a pretty good job of that themselves, IMO. And George Soros... the once-revered commodity trader... I have no idea where his allegiance lies now. He's either just wrong, or he's agreed to be a messenger for the intervention camp.

June 25 (Bloomberg) -- Governments would be ``foolish'' to limit participation in commodity markets and curb speculation because prices are based on supply and demand, London Metal Exchange Chief Executive Officer Martin Abbott said.

Rising demand from emerging markets and a lack of investment by suppliers have created a ``structural change'' in commodity markets, fueling higher prices, Abbott said yesterday in an interview in New York. Increasing regulation to limit speculative interest won't lower prices and may hamper the market's role in price discovery, he said.

``There is in the commodity space as a whole something going on which cannot be ascribed to simply hot money coming through exchanges,'' said Abbott, who heads the world's largest marketplace for copper, aluminum and other base metals. ``It would be very foolish of any government to stifle participation in markets.''

Surging prices for commodities such as crude oil, corn and copper have prompted U.S. Senator Joseph Lieberman to suggest more regulation is needed to limit the role of speculators in the markets. Billionaire investor George Soros has labeled the jump in energy prices a speculative bubble.

``Why would an elected politician have a better idea of what the price is than the summation of the entire world's oil industry trading across an open exchange?'' Abbott said. ``For a government to try and determine a good price for something is nonsense.''

``We didn't invest in plants, we didn't invest in deposits, and there's no wonder that the markets have caught up,'' Abbott said. ``What's going on here is a structural change.''

Surging Prices

The Reuters/Jefferies CRB Index, which measures a basket of 19 commodities, has gained 18 percent since March 31 and is headed for its best quarterly performance since 1973. Through yesterday, oil jumped 43 percent this year, while corn surged 64 percent in Chicago and soybeans rose 23 percent. Concerns that investment funds boosted prices rather than supply and demand have prompted U.S. regulators to investigate oil trading.

On June 18, Lieberman issued a proposal that could ban institutional investors with more than $500 million in assets from buying commodities.

The increasing role of speculators had led to a ``textbook illustration'' of a bubble in the oil market, Soros said during testimony before the Senate Committee on Commerce on June 3.

Commodity producers have also expressed concern over the role speculators play in markets. In April, the LME launched its first steel-futures contract, which has been met with opposition from steelmakers including John Surma, the chief executive officer of U.S. Steel Corp. and Lakshmi Mittal, the CEO of ArcelorMittal.

Steel Futures

``Steel is not a speculative financial instrument and should not be traded as such,'' Mittal, the head of the world's biggest steel company, said yesterday at a conference in New York. A steel-futures contract ``has no positive impact,'' he said.

Poor analysis of commodities investments may lead regulators to step in and trigger a distortion in prices, Barclays Capital analysts led by London-based Kevin Norrish said in a June 19 report. The size of investments has been overestimated and trends in supply and demand remain the key driver for prices, the analysts said.

Much of the recent analysis of commodity markets ``risks encouraging a misguided intervention in the operation of the market, which would distort prices'' and interfere with supply and demand responses, Barclays said in the June 19 report.

`Safe' Markets

``There is no way that any speculator wants to be the person driving the market,'' said Abbott, who heads the 131- year-old LME. ``Anyone can think of a strategy that would drive a market, but not many people have managed to think of a strategy that would get them out of that strategy with a profit. That's one of the things that keeps markets safe.''

Blaming price swings on traders could lead them to abandon regulated exchanges ``and use their investment dollars elsewhere,'' the International Swaps and Derivatives Association, the Futures Industry Association and the Securities Industry and Financial Markets Association said in a letter to Congress on June 18. ``Such an exodus threatens the healthy functioning of the markets and the economy.''

Abbott aims to double the LME's trading volume within five years, he said.

``Without speculators markets don't work,'' Abbott said. ``The world economy is not going to function without the free flow of cash, and the free flow of cash is not possible without the free interaction of markets.''

Copper for delivery in three months, the LME's benchmark contract, has advanced for 6 consecutive years and traded at a record $8,880 a ton in April. Steel for delivery in the Mediterranean has soared 60 percent since it was introduced in February and traded at $1,225 a ton yesterday, a record high.

And George Soros... the once-revered commodity trader... I have no idea where his allegiance lies now. He's either just wrong, or he's agreed to be a messenger for the intervention camp.

My guess is that Soros is trying his hand at what he terms the "Manipulative function". He genuinely doesn't believe that markets are perfectly efficient, which is what he's testifying. However, I'd submit that his reasons for asking for stringent regulation on the commodity trade is rooted in some ideal other than the dominance of the US economy in the global commodity trade.

I agree--speculators are not to blame. High prices are the result of stagnant supply and growing demand.

Now, supply of many of the currently booming commodities has been stagnant for a long time and demand has been growing for a long time. However, only in the past few years did demand start bumping against supply limitations, that's when prices started rising for the first time since...1973!

My recent blog post takes a look at the oil patch and I just don't see speculators driving up the prices. I see things like supply and demand.

The best quote in your excellent post is how silly it is to expect any person, politician, or investor (including George Soros who should know better) to predict future prices of anything better than the collection of all speculators freely trading opinions risking their own capital. Speculators are what keep pricing honest as millions of home speculators discovered to their chagrin. Only real demand and lack of supply due to underinvestment can drive prices. Overcapitlization of housing (too much supply at too high a price) and undercapitalization of industry especially mining and oil exploration (too little investment and low prices) are now simply adjusting. The global capital markets are working, Soros, so join the reality or be a big loser! (Past performance, George, is no guarantee of future results (this applies to Buffett as well)

Remember fellow Fools: Buffett and Soros are advisors to comrade Obama, so their capitalist guilt may be undermining their otherwise excellent financial reasoning ability.